University of Minnesota
July 18, 2016
This paper studies the strategic role of debt structure in improving the bargaining position of a firm’s management relative to its non-financial stakeholders. Debt structure is essential for strategic bargaining since it affects the ease of debt contract renegotiation and thus the credibility of bankruptcy threat. We first show that the degree of wage concessions is strongly related to a firm’s debt structure in the airline industry. Debt structure is further shown to be adjusted as a response to an increase in non-financial stakeholders’ negotiation power. Using NLRB labor union election as a laboratory setting and employing a regression discontinuity design, we find that passing a labor union election leads to an increase in the ratio of public debt to total assets and a decrease in the ratio of bank debt to total assets in the following three years after elections, while there is no significant change in the level of debt. Syndication size of newly issued bank loans increases while creditor ownership concentration decreases once vote share for unions passes the winning threshold. Various tests confirm that the debt structure adjustment after new unionization is more likely driven by strategic concerns of management rather than more constrained access to bank loans.